You’ve probably heard the phrase “hope is not a strategy.” The definition of hope is “to want something to happen or to think that it could happen” (Merriam-Webster). When it comes to saving for a financially secure retirement, many statistics would suggest that we rely more on hope than we do on strategy. We hope Social Security will be around. We hope we won’t lose our jobs. We hope we’ll be able to pay off our debts. We hope we’ll stay healthy forever. We often get consumed by the things we need to pay for today – instead of focusing on ways we can save for our longer term future. While we may hope that things will take care of themselves when it comes to money matters, the reality is that there is simply no substitute for long-term planning.
Alarmingly, one study found that nearly half (42%) of pre-retirees over age 45 say they have done little to no financial planning, and only a quarter (24%) say they work with a financial advisor. According to another report, the percentage of self-employed (think solo or small firm owner) who have no plan is slightly less (37%), and more of them work with a financial advisor (38%), but that still translates to nearly two-thirds of that demographic who might be left with nothing but hope to provide for a safe and secure retirement. If you’re one of them, know that when it comes to creating your retirement plan, hiring a financial professional may be the first step you need to take in order to turn hope into strategy.
So what value can a financial professional offer? Probably the most obvious metric you might be thinking of is the experience of a professional in recommending this or that investment fund and crafting a well-diversified portfolio, and certainly that is an impactful part of what a financial professional does for a client. Many investors acting on their own tend toward the conservative or familiar when choosing investment funds, which means they are more likely to stay with investments deemed as safe, while missing out on potential market growth that could help them achieve their financial goals. Others opt for robo-advisor apps that use algorithms to make recommendations, and then call it a day.
Analyses from both Vanguard and Russell Investments conclude that there is an increase in return from working with a human financial advisor, 3 percent and 4.8 percent, respectively, several times over the 1% that fee-based advisors typically charge. Yet underlying these increased returns is so much more than the “right” investment picks, more than a robo-advisor’s algorithms can address. What does a comprehensive, responsible financial plan look like? Let’s first dive into a couple areas often overlooked by the average worker.
Retirement planning is not all about putting a certain percentage of your paycheck into your company’s 401(k), while making sure you put in the amount your company will match. That is a start – a good and necessary start – but it just isn’t enough. For instance, according to a 2020 Retirement Confidence Survey by the Employee Benefit Research Institute (EBRI), less than half of workers polled (48%) have tried to calculate how much money they will need to live comfortably in retirement, although that is an improvement from 2019 (42%) and 2018 (38%). There are many financial uncertainties that come up along the way, and you need to be prepared for the unexpected. About 4 in 10 current retirees in another survey say they left the workforce early, over half (57%) of them involuntarily, most commonly due to health problems (32%), but also because of layoff (14%), or caregiving responsibilities (5%). Notably, the report said, “The least frequently cited common reason for an early retirement is that the individual feels financially able to do so.”6 Also, older consumers are carrying more debt, including mortgage, credit card, and even student loan debt, into their retirement years than in previous decades. With a sound financial plan in place, unexpected issues beyond your control don’t have to cause sleepless nights.
Less health, more care
Estimating the future cost of healthcare is a common oversight when planning for retirement. As mentioned above, 37% retire due to health issues, either their own or that of a loved one. Other research has found that only 39% of employees feel confident they will be able to meet health care expenses in retirement, so possibly as a result, the other 61% either plan to postpone retirement or work during retirement. It is important that you properly estimate the potential financial need for increased health care as you age – a task you may find much easier to complete with the help of a knowledgeable professional.
The cost of living … in debt
Many people are buying homes later in life, or taking out home equity loans in order to maintain quality of life. The Federal Reserve Survey of Consumer Finances for 2016 shows that the percent of older Americans with home-secured debt has risen significantly in the past 30 years. Consumer debt has increased for this population as well. Debt, especially as you near and enter retirement, can eat away at your savings or, worse, hinder your ability to save altogether. The balancing act of meeting your borrowing needs while growing your nest egg is one best performed with the help of a financial professional who can help set a sensible budget and align financial priorities for you.
A Holistic Approach to Financial Planning
Just as a holistic view of one’s physical health acknowledges the interconnectedness of the parts of the body to the whole, so also when it comes to financial health. Think of it this way: the “body parts” of our finances might include:
- savings and spending;
- debt management;
- assessing future needs;
- setting goals;
- insurance and risk management;
- tax-efficient retirement planning; and
- legacy, bequest, and estate planning.
A financial professional will be trained in most or all of these areas. A financial professional can’t make decisions for you, since those should be based on your own needs, wants and wishes, but he or she can offer recommendations based on their experience, and provide objectivity to help guide you in keeping everything in balance and consideration.
Furthermore, we’re now understanding the importance of our emotions and mental health in our overall physical well-being. The same goes for our financial well-being. Indeed, one of the less recognized roles a financial professional can play is in “behavioral coaching.”
More than a numbers game, but one that may help the numbers
Perhaps you’ve heard of the branch of study called “behavioral finance,” defined by investopedia.com in part as “a sub-field of behavioral economics [that] proposes that psychological influences and biases affect the financial behaviors of investors.” The Vanguard study3 sought to measure the value of advice not only on portfolio and financial outcomes, but also emotional outcomes: “the value of advice cannot be assessed by purely quantitative measures. It also has a subjective or qualitative aspect.” The study determined that nearly half (45%) of the total perceived value of advice is based on emotional factors, such as trust in the advisor, investors’ own sense of confidence, success and accomplishment in their financial affairs, and “hand-holding” during times of market turbulence.
Remember that statistic mentioned earlier from the Russell study? Of the 4.8% increased return from working with an advisor, close to half (2.17% – or again, 45% of that 4.8%) comes from keeping the client from making behavioral mistakes!4
The COVID-19 pandemic is a perfect example of a situation in which a financial professional can demonstrate value. Market volatility is a natural part of investing. When you buy into the market, your hope is that it continues to soar, but that’s just not realistic. The fact of the matter is stocks go up and stocks go down – that’s the gist of market volatility. It’s natural for people to get an unsettling feeling when things are out of our control. You can’t control market volatility, but you can help lessen its impact on your retirement, and the dispassionate voice of a professional in your corner to provide calm and steady perspective can keep you on track and help you stick to your plan.
Declines are completely normal. By selling your equities too soon, you may be missing out. The table below demonstrates the worst and best days in the market since 1970. As you can see there are dates as far back as the 1987 crash and dates as recent as April of this year. Also note that some of the best and worst days occurred within one week of each other.
Wide swings in markets over short time frames illustrate the need to stay invested through difficult periods. As you can see in the next chart, by missing the 30 best days of the market over the past 50 years your growth is much less significant. If you stayed invested during all the ups and downs of the market over the past 50 years you can see the significant difference as of May 6, 2020.
Past performance is no guarantee of future results. An investment cannot be made in an index. Individual results may vary to management fees, transaction costs and taxes. Performance figures do not take into account the fees and expenses of investing. You should consider your financial ability to continue investing consistently in up as well as down markets.
A competent financial professional will be aware of these inevitable market swings and keep you from the common investor behavior of buying high and selling low, which could have a negative effect on savings accumulation over time.
A Healthy Vision of the Future
Your vision for retirement is just that – yours. A financial professional can help make that vision a reality. Let’s review some of the ways a financial professional can help you pull everything together into a holistic financial plan, and maybe most importantly, help you keep it together:
- assessing future needs, like covering health care expenses;
- creating a well-diversified portfolio of investments, one that avoids overly conservative and narrowly focused fund choices;
- advising on insurance and risk-management, tax considerations, and legacy/bequest planning; and
- providing a steady and calming perspective during market volatility.
We all go through life relying on the advice of experts. That’s the beauty of living in a society where specialization can lead to improved standards of living. So why won’t more Americans work with a financial professional to help improve their retirement picture? Today, advice and guidance are available in many shapes and forms, often in conjunction with a workplace retirement plan. These services can range from professionally managed accounts via Target Date Funds to holistic Managed Account guidance, and full-service on-line, phone-based, or in- person financial planning. There is likely a “flavor” of advice for nearly everyone. The challenge is getting more people to the table to have a taste.
Financial planning is a complex field where decisions are fraught with behavioral pitfalls. A professional can use proven methods and experience to develop a personalized retirement plan based on your needs, wants and wishes. When it comes to long-term planning, hope is not a strategy – but a sound financial plan developed with the help of a financial professional should certainly give us hope for a secure and comfortable retirement. And bearing in mind the holistic nature of things, how our emotions affect our physical health, alleviating stress and promoting peace of mind in the financial area of our lives could spill over into improved physical health, of special concern during this pandemic.
About the ABA Retirement Funds
The ABA Retirement Funds, an affiliate of the ABA, is dedicated to helping lawyers with their retirement by providing fully bundled retirement solutions for law firms of all sizes. Established in 1963, the organization has nearly 4,200 law firm retirement plans, more than 37,000 participants, and over $5.5 billion in assets in the ABA Retirement Funds Program (www.abaretirement.com).
The information in this article is believed to be reliable. However, this newsletter is distributed with the understanding that the Program is not engaged herein in rendering legal, tax, accounting, investment management or other professional advice.
 Aging and Retirement, 2019 Risks and Process of Retirement Survey: Report of Findings, Greenwald & Associates, © 2020 Society of Actuaries
 Self-Employed: Defying and Redefining Retirement: Select Findings from the 19th Annual Transamerica Retirement Survey, July 2019
 Is It Worth the Money to Hire a Financial Advisor? New Vanguard Study Calculates the True Value of a Financial Advisor, by Wes Moss, updated November 4, 2018 https://www.thebalance.com/should-you-hire-a-financial-advisor-4120717
 VALUE: 2020 Value of an Advisor Study – How can financial advisors amplify their value? https://russellinvestments.com/Publications/US/Document/Value_of_an_Advisor_Study.pdf
 2020 Retirement Confidence Survey Summary Report, Employee Benefit Research Institute/Greenwald & Associates, April 23, 2020
 Institutional Retirement Reference Guide, First Edition (2019), LIMRA Secure Retirement Institute
 PwC’s 8th annual Employee Financial Wellness Survey: 2019 results, https://www.pwc.com/us/en/private-company-services/publications/assets/pwc-2019-employee-wellness-survey.pdf
 Federal Reserve Survey of Consumer Finances, 2016 SCF Chartbook, https://www.federalreserve.gov/econres/files/BulletinCharts.pdf
 Bloomberg: S&P 500 index for period 1/2/1970-5/6/2020
 Bloomberg. Growth of $115,000: S&P 500 index for period 1/2/1970-5/6/2020